The Wall Street Journal - 13.08.2019

(Ann) #1

A10| Tuesday, August 13, 2019 THE WALL STREET JOURNAL.


absorb some of the higher tar-
iff. A Home Depot spokesman
declined to share details about
the retailer’s approach, saying
its strategy varies across ven-
dors and products and it makes
“every effort to lessen the im-
pact on the consumer.”
HMTX, which Mr. Stone said
has about $700 million in an-
nual revenue and a net profit
margin in the mid-single digits,
has a wholesale division that
sells to other regional distribu-
tors in the U.S. That division
decided to raise prices by
nearly 20% on flooring. Whole-
salers in general have in-
creased prices of luxury vinyl
flooring by as much as 50
cents a square foot, or close to
25%, according to estimates
from industry executives.
The 18 Flooring Liquidators
retail stores in California carry
Chinese-made products from
HMTX, among others. The
chain has raised prices for
some products because of the
tariffs. Tiles for a living room,
dining room and hallway space
can run up to hundreds of dol-
lars more than before.
“You can’t have a 25% in-
crease and not have an effect
on retail prices,” said Stephen
Kellogg, president and owner.
As for other tariff-hit house-
hold goods, such as washing
machines and furniture, FFO
Home in Fort Smith, Ark., is
raising prices on couches and
dining-room sets with parts
from China. Store owner Larry
Zigerelli said some items have
already gone up by 10% be-
cause of tariffs imposed last
year, and he expects to raise
prices more as manufacturers
pass on 25% tariffs.
For now, consumer spending
in the U.S. is solid. By econo-

mists’ estimates, it will take
three to six months for some
portion of the tariff costs to be
fully reflected in consumer
prices.
On average, an American
household will pay about $
more each year under the 25%
tariffs the U.S. has imposed on
$250 billion in Chinese goods,
according to Trade Partnership
Worldwide, a consulting firm
working with industry groups.
Consumers’ costs to are likely
to rise more if President
Trump carries through with
10% tariffs he announced this
month on the roughly $300 bil-
lion in annual Chinese imports
not yet taxed.

Permanent change?
“There’s certainly going to
be people who just can’t afford
the same good,” said Katheryn
Russ, a University of California,
Davis, economics professor.
CFL Flooring, one of the
largest exporters of flooring
from China to the U.S., with
around 2,600 workers at facto-
ries in Jiaxing city south of
Shanghai, sees the tariffs as a
portent of permanent change.
CFL decided last fall to set up
factories in Taiwan and Viet-
nam and started shipping
goods from those sites in
March.
“The desire to not be depen-
dent on China is here to stay,”
said Thomas Baert, a CFL co-
owner. “Whatever happens
with tariffs, certain customers
have made up their mind that
they want to be out of China
for X% of their business.”
Mr. Stone thinks most man-
ufacturing of vinyl flooring will
remain in China. Since he be-
gan purchasing the product in

Stone took care to project opti-
mism with Mr. Sun and other
suppliers. Fresh designs were
in the pipeline, he reminded
them, and a new digital print-
ing method from Italy would
allow them to adapt designs
more quickly. American cus-
tomers would see that their of-
ferings were higher-quality and
pick those, Mr. Stone said.
He reminded them, too, that
Home Depot hadn’t canceled
any orders and was prepared
to fight the tariffs too. Still, the
lack of a firm deal with the re-
tailer, at the time, nagged him.
Over the following weeks,
there were emails, phone calls
and texts with the Home Depot
team. Mr. Stone’s colleagues
made trips to the chain’s At-
lanta headquarters. Their pitch
was that Home Depot should
share the tariff burden, other-
wise HMTX and its manufac-
turers wouldn’t have money to
invest in designs and processes
to remain competitive.
“All that costs money,” Mr.
Stone recalled saying. “I’ve
built warehouses, I’ve stocked
them, I have robots taking or-
ders. If I don’t keep doing this,
we’ll both lose.”
Home Depot’s argument for
footing less of the bill, accord-
ing to Mr. Stone, was that with
this type of product, raising re-
tail prices risked driving away
customers. Unlike fixing a
leaky roof or replacing a bro-
ken washing machine, home-
owners could put off buying a
new floor.
Home Depot set up what
employees called a “tariffs war
room” to analyze products and
costs and devise pricing strate-
gies, Mr. Stone said. In late
June, Home Depot’s chief exec-
utive told CNBC it was working

try to avoid passing it on to
consumers for fear of losing
sales. Mr. Stone and his Chi-
nese partners initially ate
most of the vinyl flooring tar-
iff cost, passing just a tad on
to retailers.
Tariffs at the 25% level are
quite another matter. They are
upending cost projections and
business models and straining
relationships built up over de-
cades. For operations such as
Mr. Stone’s, the math is pain-
ful. He and others are trying to
figure out how much of the
new expense can be dispersed
throughout the supply chain,
how much should be passed to
customers, at what potential
cost in lost sales, and how
much they must swallow.
These tit-for-tat tariffs, at
their new higher levels, are
forcing businesses into tortu-
ous calculations and negotia-
tions. How these ultimately
turn out will have ramifications
throughout the U.S. economy,
determining how the higher
costs get distributed and what
effects they may have on sales,
as the U.S. and China dig in for
what is becoming a protracted
trade battle.
“This is a chaos moment. If
I pay the tariffs, I don’t have
any money,” said Mr. Stone.
The 61-year-old has been
buying goods from Asia since
the 1970s, first from Taiwan
and later mainland China, hav-
ing followed his father into the
vinyl flooring business.
The product, often made to
look like hardwood flooring or
stone, was one of the largest
categories of Chinese exports
on the U.S. target list for tar-
iffs. The U.S. vinyl flooring
market was worth about $3 bil-
lion last year, with most com-
ing from China, according to
Stifel Equity Research Group.
High-end flooring, the kind Mr.
Stone sells through his whole-
sale and distribution business,
makes up most of that market
and is growing roughly 25% an-
nually.
His Chinese suppliers, part-
ners for decades, were
shellshocked by the latest tar-
iffs, fearing they and their
thousands of workers would
face canceled orders from U.S.
customers. Some smaller Chi-
nese suppliers began offering
discounts to European buyers
to unload inventory.


Cheerleading


On his trip to China, part of
a multipronged search for tariff
solutions that has absorbed
him for months, Mr. Stone
acted as a cheerleader, trying
to rally his partners.
“Do not stop production. Do
not let your workers go home.
Finance yourselves locally,” he
instructed managers at
Zhangjiagang Elegant Home-
Tech Co., a family business
started by a Chinese factory
worker-turned-entrepreneur
and now run by that man’s
Canada-educated son.
Mr. Stone and his Connecti-
cut-headquartered HMTX In-
dustries LLC wanted a commit-
ment from Home Depot to


Continued from Page One


what the secret was to his en-
ergy and health.
Other journalists have be-
come quasi celebrities, includ-
ing a local energy reporter
who sports a slim black mus-
tache and a trademark bow
tie. In the wake of a gasoline
pipeline explosion that killed
137 people in January, he
asked about the temperature
at which “the molecule”—re-
ferring to gasoline—would ig-
nite, so that people at filling
stations might be careful.
The question went viral and
quickly earned the reporter
the moniker “Lord Molecule”
on Twitter.
The president has also
opened up the conference to
YouTube and Twitter person-
alities—part of what he calls
the “blessed social media”
that helped him get elected.
Some, with names like the No-
pal Times, are openly pro-gov-
ernment. Another site, called


Continued from Page One


“El Chapucero,” or “The Bun-
gler,” has nearly a million sub-
scribers and sells López Obra-
dor-themed T-shirts, mugs,
and socks.
“It’s less an exercise in
transparency and accountabil-
ity than in political communi-
cation,” says Juan Pardinas,
the editor of Mexico’s re-
spected daily Reforma, which
is often attacked by the presi-
dent as “posh press.”
“Ironically, he’s using a
news conference to remove
the media in their role as in-
termediaries and take his
message directly to the peo-
ple,” he adds.
The president’s legions of
supporters welcome a chance
to hear directly from a leader
they trust. “It feels good to
know the president is in
charge so early in the morn-
ing,” says Raúl Palacios, a
burly 34-year-old mechanic
who says he often watches
parts of the conference on
YouTube during work breaks.
Many local media are wary
of challenging the president
because the vast majority de-
pend on government advertis-
ing to break even, says An-
drew Paxman, a historian and
media expert at the CIDE re-
search university in Aguascali-
entes. This year’s government

budget calls for some $
million in such advertising.
Journalists who ask tough
questions often get attacked
on social media by the presi-
dent’s followers or heckled by
supporters at the Mañanera.
Mr. López Obrador has denied
he is behind the intimidation,
but in April he told journal-
ists: “If you step out of line,
you know what will happen.
But it won’t be me, it’s the
people.”
According to an analysis by
Spin, a local political consult-
ing firm, the president makes

on average six false state-
ments in each news confer-
ence.
In April, Mr. López Obrador
said his government had vio-
lence under control and that
murders hadn’t increased in
the first quarter of the year.
In fact, murders increased
8% to some 8,500, the highest
on record, according to fig-
ures of his own interior minis-
try. He said he had “other fig-
ures.”
He also boasted that formal
job creation in the January-
March period increased at a

pace not seen in 10 years,
when in fact was the lowest
since 2014, according to local
think tank Mexico Cómo Va-
mos.
Throughout, one theme is
constant: The president was
elected to lead the country
out of a dark period of neolib-
eral economic policies like
privatizations that protected a
corrupt and conservative elite
at the expense of Mexico’s
good and honest people.
It is a message that reso-
nates in a country with one of
the world’s highest gaps be-

tween rich and poor.
As part of his populist ap-
peal, he cut his own salary by
half, and slashed the wages of
most other top officials as
well. He is selling the presi-
dential plane, a new Boeing
787-8 Dreamliner, and travels
economy on commercial
flights. He opened up the for-
mer presidential residence to
visitors, allowing more than a
million Mexicans to walk its
gilded halls.
Recently, he was asked to
respond to the IMF having
lowered its growth estimate
for Mexico’s economy to 0.9%
this year from 1.6%. The presi-
dent responded by blasting
multilateral organizations.
“With all due respect, those
organizations were the ones
that imposed neoliberal eco-
nomic policies that did so
much damage to Mexico. I
think they should apologize to
the people of Mexico,” he said.
He has also asked the Span-
ish king and Catholic Church
to apologize for the Conquest.
One of the few topics that
leave him tongue-tied is Mex-
ico’s sometimes-rocky rela-
tionship with the U.S. presi-
dent. When asked about
Donald Trump, Mr. López Ob-
rador often just replies,
“Peace and love.”

with suppliers to offset tariff
costs, although part of the 25%
would be passed to consumers.
A few weeks later, according
to Mr. Stone, after six different
offers and multiple revisions,
he and Home Depot reached an
agreement that will last until
February. Without providing
specifics, he said it was “in the
spirit of half-half.” His Chinese
partners, he said, were re-
lieved.

Lobbying effort
Meanwhile, Mr. Stone is try-
ing to get luxury vinyl flooring
off the list of tariffed products.
One argument he makes is that
U.S. manufacturers can’t meet
the huge demand for vinyl
flooring at home. He has teams
of lawyers in New York, Wash-
ington and Hong Kong working
the issue and said he is in
touch with legislators to help
lobby the Trump administra-
tion.
In another challenge he
faces, a rival that makes vinyl
tiles in America, Mohawk In-
dustries Inc., has lobbied in
Washington in favor of tariffs
on China-made goods. This
year, Mohawk petitioned the
U.S. International Trade Com-
mission to block Chinese im-
ports, alleging patent infringe-
ment.
On a recent Friday, Mr.
Stone was in New York to meet
a lawyer about next steps in
the patent-infringement case.
It had been nearly a year since
the Trump administration im-
posed duties that hit the vinyl
flooring business.
“Eighty percent of my time
and nearly 100% of my energy
goes to dealing with the tar-
iffs,” Mr. Stone said.

July-August

$540billion
ingoodsfrom
Chinain

$120billion
ingoods
fromU.S.
in

$50billion

September

U.S.imposes
tariffsonan
additional
$200billion.

China
imposes
tariffsonan
additional
$60billion.

May2019Tariffs
increaseon
theadditional
$200billion.

Chinaalso
raisestariffs
onthe
additional
$60billion.

Aug.1, 2019

Trump
announces
tariffsonthe
remaining
imports.

Chinaallows
yuanto
depreciate
significantly
againstthe
dollarin
retaliation.

U.S.
imports
fromChina

Chinese
imports
fromU.S.

Upto10%tariff
Upto25%tariff

TariffTrail
Tradedutiesimposedbythe
U.S.andChinaoneachother’s
goods

Source: U.S. Census Bureau (2018 imports)

25% Tariffs


Have Firms


Squirming


Wake-Up


Call From


President


FROM PAGE ONE


China in the 1980s, he said, the
country has developed a deep
pool of skilled labor and qual-
ity manufacturers that would
be hard to replicate.
Hundreds of Chinese facto-
ries compete for business, in-
vesting in new technologies to
improve costs and products.
Chinese suppliers, Mr. Stone
said, have led the way in pro-
ducing a thinner but stronger
and more affordable form of vi-
nyl flooring in recent years.
When he started working
with Zhangjiagang Yihua Plas-
tic Co., the company was still
state-owned. The government
assigned a demobilized mili-
tary officer, Sun Yonghua, to
run the company and he later

privatized it, retaining Mr.
Stone as a customer.
In May, over a dinner of
crayfish, beef hot pot, fish and
red wine, the two men dis-
cussed the tariffs and what to
do about them. Mr. Sun said he
was confident his company
would get support from big
Chinese banks, and that would
help him weather the tariffs.
Mr. Sun bellowed that their
more than 30-year partnership
would survive. “Under your
leadership, we aren’t afraid of
the trade war,” he said, raising
a toast to Mr. Stone. The two
exchanged pictures of their
grandchildren.
Throughout his trip, Mr.

‘We find every
quarter-point we
can,’ says a vinyl
flooring importer.

Facing 25% tariffs on Chinese vinyl flooring, importer Harlan Stone went to Zhangjiagang, China, to meet with his longtime suppliers.

RAUL ARIANO FOR THE WALL STREET JOURNAL

Mexican President Andrés Manuel López Obrador at his daily morning news conference.

SASHENKA GUTIERREZ/EPA/SHUTTERSTOCK
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